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Integrating ERP and e-business: Resource complementarity in business

value creation
Pei-Fang Hsu ⁎
Institute of Service Science, College of Technology Management, National Tsing Hua University, No. 101, Section 2, Kuang-Fu Road, Hsinchu 30013, Taiwan
a b s t r a c t a r t i c l e i n f o
Article history:
Received 31 October 2011
Received in revised form 15 May 2013
Accepted 28 June 2013
Available online 8 July 2013
Keywords:
Complementarity
ERP
Business integration
IT integration
Resource-based view (RBV)
Business value
We investigate the complementary effect between ERP and e-business technologies, and the impact of such
effect on business value creation. Previous studies have examined the effects of ERP and e-business technologies
independently, and show positive effects on business value from their use. However, both the resource based
view and microeconomic theory as well as practitioner experience suggest that the impacts from their joint
and complementary use should be much greater, but this proposition has not yet been examined empirically.
We use two different approaches (product termand direct measure approaches) to measure the complimentary
effect. Comparing results using firm performance accounting data with self-reported survey data of 150 U.S.
manufacturing firms, we provide confirming empirical evidence that the complementary effect between ERP
and e-business technologies in creating business value is stronger than the main effects of ERP or e-business
technologies alone. We further find that the complementary use of these IT resources to build system and
business integration capabilities can extract the most complementarity value for firms. These findings provide
empirical support for the theory of competitive advantage that the resource based view (RBV) proposes.
Furthermore, these findings provide practical guidance to firms on how to utilize and deploy ERP and
e-business technologies in a mutually reinforcing manner.
© 2013 Elsevier B.V. All rights reserved.
1. Introduction
Enterprise resources planning (ERP) systems are large commercial
software packages that standardize business processes and integrate
business data throughout an organization [21,47,74]. These systems
codify and organize an enterprise's business data into an integrated
database, and transform the data into useful information that supports
business decisions [68]. The ability to access information from various
parts of an organization has helped firms to streamline their business
processes and reduce inefficiencies [75]. In both large and medium
size firms, ERP systems represent the largest portion of the application
budget and about one-third of their IT budgets [41,53].
Although the benefits of ERP are considerable, traditional ERP sys-
tems that streamline and integrate internal processes improve efficiency
only within the boundaries of an enterprise [21]. Because firms' value
chains increasingly extend beyond their boundaries and include other
firms within their business ecology, it is important to improve opera-
tional performance along the whole supply chain. Inventory turnover,
asset utilization, and profitability depend on improved processes
and information flows not only inside the focal firm, but also those
“between” firms [50]. The full potential of an ERP systemcannot be real-
ized if its integration and coordination capabilities are confined within
the walls of a firm [75].
E-business technologies have exploded on the scene in the last
decade, and some advocates claim that they are the ultimate solution
to the information exchange problemamong firms' enterprise systems.
Consistent with previous studies [5,26,87], e-business technologies are
defined as the Internet-based technologies, such as Extranets, Websites,
and EDI communication technologies that link two firms for performing
e-business functions such as online selling, online purchasing, online
coordination and online information sharing. Because of their lower
cost and greater ease of implementation/use, e-business technologies
hold the promise of enabling information made from ERP systems
to be shared among firms in the extended supply chain [4,75]. E-
business technologies serve to extend the original value proposition of
ERP [27,36], offer an ERP-based organization the opportunity to build
interactive relationships with its business partners [3,4], and bring
together their previously separate information at a very low cost [55].
E-business technologies comprise the external part of the extended
enterprise, and ERP comprises the internal portion [55].
From a technical point of view, Fig. 1 shows how ERP fits with e-
business. In the middle is a focal firm's ERP system that was originally
used only inside the firm. From the left hand side, with middleware
software that is based on industry pre-defined standards such as
RosettaNet, XML (extensive markup language) and more recently
web services and service oriented architecture (SOA), information
generated by ERP systems can be shared via the Internet/EDI directly
with suppliers' ERP systems. If a supplier does not have an ERP system,
it can still receive and exchange business information through an
Decision Support Systems 56 (2013) 334–347
⁎ Tel.: +886 3 5742221.
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http://dx.doi.org/10.1016/j.dss.2013.06.013
Contents lists available at ScienceDirect
Decision Support Systems
j our nal homepage: www. el sevi er . com/ l ocat e/ dss
Extranet website. Therefore, useful information such as inventory
levels, production planning and materials purchasing can be exchanged
between the focal firm and suppliers via ERP and e-business technolo-
gies, as referred to business to business integration. Similarly, on
the right hand side, the focal firm can exchange valuable business
data with its customers, such as order status, invoice, and online order
fulfillment.
As more and more established organizations realize that they need
to form alliances with their customers and suppliers over electronic
networks, integrating e-business technologies with ERP systems
become a critical issue [3,4,47]. Several IS researchers have identified
ERP and e-business integration, as one of the most important IS areas
for future research [11,32,75]. Others indicate that reconfiguring and
integrating ERP systems with front-end web-based systems to support
e-business initiatives should be at the top of the list for IS executives
[67,73].
However, the extant literature investigating the value of ERP
focuses on its internal integration capability only (see literature review
below), and neglects the potential huge value fromexternal integration
enabled by the e-business technologies. Thus, this study brings a more
complete assessment of ERP value by focusing on both internal and
external integration. In other words, although existing studies have
already addressed the importance and examined the benefits of using
ERP and e-business technology individually, they are limited in consid-
eration of integration between the two technologies as an important
factor for firms to fully extract the benefits of IT. Our study investigates
the complementary effect between ERP and e-business technologies.
In summary, there are two gaps in our understanding that need
more research efforts. First, how to complementarily integrate the
two technologies is not well understood. We need a theoretically rigor-
ous framework and an empirically validated measure to calibrate the
complementary level of the two technologies. Based on resource based
view (RBV) and microeconomic theory that provide theoretical ratio-
nale for complementarity, this study develops a theoretical framework
and proposes two different approaches to measure the complementary
effect—the product term approach and direct measure approach.
Second, whether the complementarity between ERP and e-business
technologies contributes to business value has not been assessed
empirically. Whether ERP's full potential can be better realized in the
e-business era has not been confirmed. Our study intends to use large
scale data to validate the theoretical framework and confirm the bene-
fits of integrating ERP and e-business technologies.
2. Literature review
In this section, we first review two streams of existing studies that
build our knowledge: (1) Business value of ERP and (2) business
value of e-business technologies. We then draw from resource based
view and microeconomic theory to develop a theoretical framework
and hypotheses for understanding the complementary effect of ERP
and e-business technology.
2.1. Business value of ERP
The Business value of ERP can be categorized into three facets,
intangible, operational, and financial. At intangible level, Mabert et al.
[42,43] reported that the most improvements after using ERP were
in intangible areas such as increased interaction across the enterprise,
quicker response time for information, integration of business process,
and availability and quality of information. Gattiker and Goodhue [25]
showed that ERP can deliver intangible benefits to firms including
better information, more efficient internal business process, and better
coordination between different units of a firm. At operational level,
Banker et al. [5] found that ERP systems have positive impact on plant
performance including product quality, product time to market, and
plant efficiency, while Mabert et al. [42,43] indicated there were also
operational improvements in order management, on-time deliveries,
and customer interaction. Cotteleer and Bendoly [20] used longitudinal
data from an ERP implemented firm to show that order fulfillment
lead-time was significantly improved after ERP system deployment.
Lastly, Karimi et al. [33,34] found that ERP implementation is associated
with process efficiency, effectiveness, and flexibility.
At financial level, mixed results are found in previous studies. Hitt
et al. [31] compared data of 350 ERP adopters and non adopters and
found that ERP adopters showed positive but not consistent perfor-
mance results on productivity, profitability, and market value measures.
They found that while ERP adopters showed a better performance on
productivity, Return on Assets (ROA), inventory turnover, and profit
margin, they have a significant negative performance on Return on
Equity (ROE). They also found some evidence of a decline inproductivity
and business performance shortly after completion of the implementa-
tion. Partially replicating Hitt et al.'s work, Aral et al. [2] collected finan-
cial data of 623 US firms that were ERP adopters over a 7-year-period
(1998 ~ 2005) to investigate the business value of ERP. Their results
showed that using ERP systems improves productivity, inventory turn-
over, and asset utilization, but had no association with ROA, ROE, and
Profit margin. Poston and Grabki [59] compared 54 ERP adopters and
non adopters and found that ERP implementation was associated with
an unexpectedly significant cost increase — Cost of Goods Sold (COGS)
and Selling, General and Administrative Expenses (SG&A) — one year
after implementation, and no association was found with income
changes. Ranganathan and Brown [62] found that firms implement
greater ERP functional scope or greater physical scope receive greater
Middleware
Server
RosettaNet, Web Services,
SOA and XML
Supplier
ERP System
Internet
or EDI
E-Business
(with Suppliers)
Supplier
without
ERP system
Internet
Purchasing
Module
Material
Mgmt.
Module
Production
Planning
Module
Sales and
Distribution
Module
Financial
Module
Human
Resources
Module
Focal Firm’ sERP system
E-Business
(with Customers)
Internet
or EDI
Internet
Customer
ERP System
Customer
without
ERP system
Extranet web
Middleware
Server
RosettaNet, Web Services,
SOA and XML
Extranet web
Fig. 1. How ERP fits with e-business.
335 P.-F. Hsu / Decision Support Systems 56 (2013) 334–347
shareholder returns. Appendix A shows more details about these
studies.
In summary, while the existing studies have significantly expanded
our understanding of ERP business value, the results are mixed with
some indicating improved value and others not. A reviewof IT business
value research [50] suggests that in addition to looking at the IT within
the firm, we should also look at interfirm IT linkages because some
performance improvements such as inventory turnover, better asset
utilization, or profitability depend on improved processes and informa-
tion flows “between” firms. Jacobs and Bendoly [32] also pointed out
that most existing ERP research focuses on the impact of an ERP system
itself, but not on the much richer area of ERP extendibility. They argue
that with the growing popularity of B2B and B2C e-commerce systems,
there should be a strong interest in assessing how to best integrate the
functionality of these systems with ERP systems to provide competitive
advantage for firms.
2.2. Business value of e-business technologies
Several studies have examined the relationship between e-business
technologies and firm performance. Using self-reported survey data,
Lederer et al. [37], Barua et al. [9] and Zhu et al. [87,89] found a positive
and significant relationship between e-business use and firm perfor-
mance. However, they stressed the limitation in their studies that the
subjective performance measures could potentially induce biases, and
therefore, firm level accounting data is needed to confirm these
findings. Yet, using objective accounting data, Zhuet al.'s [86,88] studies
showed that e-business use is significantly associated with Cost of
Goods Sold and inventory turnover, but it had weak or no association
with Return on Assets (ROA) and Gross Margin. Appendix B shows a
summary of these studies.
IS researchers indicate that the limitation of current e-business
studies is neglecting the important role of ERP in e-business settings,
and encourage future studies on e-business to focus on more specific
questions about how a firm integrates the Internet with its existing
internal IS such as ERP systems [10,87]. Jacobs and Bendoly [32]
pointed out that while buzzwords like “B2B”, “B2C”, and just about
anything else preceded by an “e-” seem to have taken center stage,
yet ironically, each of these new terms at their most basic levels repre-
sent extensions of ERP systems to the customers and to the suppliers. A
true e-business enabled firm needs the support from a well-tuned ERP
system, since ERP is the core to fulfill the promises made on the web
pages. Without clean internal processes and data that are provided
by ERP systems, e-business may be just flashy web pages with no real
substance behind them [55].
Overall, the foregoing studies of ERP and e-business technologies
indicate that they each could contribute to the business value of IT.
However, none of the previous studies examinedthe role of ERP systems
linked with e-business technologies in interfirm or interorganizational
systems. Melville et al. [50] and Mukhopadhyay and Kekre [54] suggest
that such interorganizational linkages might produce greater benefits
than either technology alone. Consequently we propose to investigate
both the independent and the complementary effect of ERP systems
and e-business technologies on business performance. In order to have
a solid theoretical framework to guide the research, we draw from the
resource-based theory and microeconomic theory to develop theoretical
propositions.
2.3. Theoretical background: Resource complementarity in RBV and
microeconomic theory
The Resource-Based View (RBV) argues that firm resources are
heterogeneously distributed across firms. When the firm resources
are valuable, rare, imperfectly imitable, and nonsubstitutable, they
could create competitive advantages, which in turn could explain the
differences in firm performance [8,28,84]. Moreover, resources tend to
survive imitation because of isolating mechanisms such as history
dependence, causal ambiguity, and social complexity [8]. The RBV (or
its variations) has been applied by information system (IS) researchers
to analyze the business value of IT (see Wade and Hulland [81] for
a review).
Resources and capabilities are two terms that have been frequently
used in the RBV theory. This paper distinguishes between “resources”
and “capabilities” based on the definitions in RBV literature
[1,28,29,44,81]. Resources are inputs into a firm's production pro-
cess, such as capital, equipment, information systems, and individ-
ual employees. Capabilities, in contrast, refer to a firm's capacity to
deploy resources using organizational processes. Capabilities can be
viewed as the capacity of a bundle of resources to perform some task
or activity. Through continued use, capabilities become more difficult
for competitors to understand and imitate [28,29,63,81].
Most previous studies based on the RBV posit a direct relationship
between IT resources and firm performance [12,49,65]. More recently,
some researchers have emphasized that the IT resource is likely to affect
firm performance only when it is deployed to create unique “comple-
mentarities” with other IT or other firm resources [13,60,61,63,76].
Complementarity represents an enhancement of resource value and
arises when a resource produces greater returns in the presence of
another resource thanby itself [51]. Resources rarely act alone increating
or sustaining competitive advantage, and this is particularly true of IT
resources that, in almost all cases, act in conjunction with other firm
resources to provide strategic benefits [81]. IT-based success rests on
the ability to “fit the pieces together” complementarily [63].
The importance of complementarity is not only argued by the
RBV researchers, but also by microeconomic scholars. The idea of opti-
mization in microeconomic theory [51] provides an approach to model
complementarity formally. Using microeconomic theory, Milgromet al.
[51,52] provide a simple example in the following to explain why
integrating complements (in our paper, ERP and e-business systems)
is difficult, slow, hard to be duplicated, and if they are successfully inte-
grated, it may bring firms more profits.
Inside a firm, two managers in different departments control inputs
x and y separately. Both of them seek to maximize profits as given by
the entries in the Table 1. The payoff function f(x, y) depends on the
parameter Θ. If Θ increases from 0 to 2, the optimal levels of x and y
rise from (low, low) to (high, high). However, since we usually do not
know how Θ changes (increase or decrease, and the speed of increase
or decrease as a function of x and y), it's not easy to find the optimal
level of x and y to maximize the firm's total profits. Furthermore,
if the two managers make their decisions separately on how much x
and y should be invested, (i.e. x and y are not fully coordinated or
successfully integrated), suboptimal decisions such as (low, high) or
(high, low) will happen. Milgrom et al. [51] argue that, “Suppose Θ
increases from some value Θ′ b 1 to a value Θ″ N 1. No amount of indi-
vidual, uncoordinated search will find an improvement, and the system
can get stuck at the suboptimal position. This example illustrates how
strong complementarities make it more likely that individual adapta-
tions will fail to converge upon optimal results and why change in a
system marked by complementarities may be difficult. Changing only
a few of the system elements at a time to their optimal values may
not come at all close to achieving all the benefits that are available
through a fully coordinated move, and may even have negative pay-
offs.” Borrowing the same idea from the example, we understand why
practitioners often claim it is not easy to integrate two complements
Table 1
Milgrom et al.'s example.
Payoff function: f(x, y) Low y High y
Low x 5 4
High x 3 4 + Θ
336 P.-F. Hsu / Decision Support Systems 56 (2013) 334–347
(ERP and e-business systems) at their optimal levels to receive the
highest total value. It takes time, effort, and experience to find the char-
acteristics of Θ. The know-howof extracting the most complementarity
value (Θ) is firm specific.
Insummary, why does complementarity between IT resources make
it more possible for firms to achieve competitive advantage than one
resource alone? Based on the RBV literature and microeconomic theory,
we propose two explanations for the role of complementarity in IS
context. First, in general, physical technology such as a complex infor-
mation system, by itself is typically imitable. If one firm can purchase
these physical tools of production, then other firms should also
be able to purchase these physical tools, and thus such tools should
not be a source of sustained competitive advantage [8]. On the other
hand, if a firm can exploit physical technology involving the use of
socially complex firm resources, the synergies among them are far
more difficult to imitate [9,88]. Several firms may all possess the same
physical technology, but only some of these firms may possess the social
relations, culture, traditions, etc. to fully exploit this technology in
implementing strategies [8].
Second, complementarity means not only the co-presence of the
two resources as indicated above, but also that the two resources are
used in a mutually reinforcing manner. How effective a firm is in using
two ITs in a reinforcing manner to support and enhance its business
core competencies is difficult. Therefore, complementarily leveraging
resources is considered a firm-specific capability [29,44]. Numerous
studies have commented that integrating IT resources (systems) to
build a flexible and sophisticated IT infrastructure requires both consid-
erable time and expertise [6,47,61,63]. Although the individual compo-
nents that go into the infrastructure are commodity-like, the process
of integrating the components to develop an infrastructure tailored to
a firm's strategic context is complex and imperfectly understood [12].
3. Model and hypotheses
Since the above theories provide two different rationales to explain
complementarity, we propose two corresponding research models
to investigate ERP, e-business technologies, and their complementary
effect on business value. Model 1 represents the first rationale that
the theories provide: Firm resources are considered complementary
when the presence of one resource enhances the effect of another
resource. This interaction perspective of complementarity is typically
operationalized using multiplicative terms in statistical analysis [63].
Hence, we measure the level of complementarity by the product of
ERP and e-business technologies variables (Fig. 2).
Model 2 represents the second rationale that the theories provide:
Resource complementarity is based on howresources are utilized and
deployed; complementaries arise when resources are used in a mutu-
ally reinforcing manner [63]. RBV and microeconomic theory argue
that complementarily deploying and utilizing resources is a firm-
specific capability. Model 2 assesses complementarity by measuring
how ERP and e-business technologies are integrated and utilized at
two levels (Fig. 3). The first level measures how the two technologies
are integrated at the information system level. The second measures
how the integrated ERP and e-business system is utilized at the busi-
ness process coordination level (left-most bubbles in Fig. 3).
The reason we gage the complementarity at two levels is based on
Markus's distinction between information system integration and
business process coordination [48], which has also been proposed
by many IS researchers [6,24,61,62]. System integration refers to the
creation of tighter linkages between different computer-based infor-
mation systems and databases. Business process coordination repre-
sents the extent to which the business process of two firms are tightly
coordinated and standardized through information systems [6,78].
System integration is required to achieve business coordination;
however, even when system integration is achieved, the goals of
business coordination may not be realized. Due to the concerns about
information leakage, firms usually are reluctant to exchange business
information with their business partners [16]. Two firms might both
achieve a high level of system integration, but their business coordina-
tion level might vary. Systemintegration is viewed as a prerequisite and
facilitator of business coordination, but does not guarantee a firm's
willingness to achieve a higher level of business coordination [48,61].
Rai et al.'s study [61] on supply chain integration capabilities distin-
guishes “IT infrastructure integration” and “supply chain process inte-
gration”. They argue that lower-order IT integration capability enables
higher-order process integration capabilities. We adopt the same view
and measure both system integration and business process coordina-
tion in this study.
In addition to the theoretical arguments, there are two other
methodological advantages that motivate us to use the two different
approaches: First, guidelines for research on complementary effect
(interaction effect or fit) suggest that researchers should compare the
utility of different statistical techniques using the same data set because
each technique has implied biases [77]. Studies should be designed
to permit comparative evaluation of as many forms of “fit” as possible
[80]. Second, using the directly measured and observable items to
assess the complementarity construct, we can unpack the complemen-
tarity effect and thereby provide practical guidelines to practitioners
about how to use the two technologies to achieve complementarity.
Control Variables:
Firm Size, Industry, Year, ERP Vendor
ERP modules
E-Business
technologies for
communication
ERP*EB
Interaction
Business
Value
Cost Efficinecy
Differentiation
H
1
H2
H
3
Complementary Effect between ERP and E-Business Technologies
(Product Term Approach)
Intangible
Fig. 2. Research model 1.
337 P.-F. Hsu / Decision Support Systems 56 (2013) 334–347
3.1. Hypothesis development
Based on the theoretical foundation discussed above, ERP systems
focus on internal process efficiency and effectiveness, and can coordi-
nate information across different departments within a company. ERP
systems are expected to affect internal firm operations by decreasing
internal coordination costs [6,59]. On the other hand, e-business tech-
nologies are focused on external, cross-enterprise process efficiency
and effectiveness. They can reduce external coordination costs and reap
the benefits of supply chain integration [40,59]. Therefore, we propose
the following hypotheses:
H1. A firmwith more complete ERP modules to provide cross-functional
integration is more likely to gain business value.
H2. A firm with more complete e-business technologies to provide
inter-firm integration is more likely to gain business value.
Integrating ERP and e-business is extremely complex. First, when
implementing an ERP system alone, it comes in numerous configura-
tion tables that must be customized to suit a firm's business needs,
and the customization is a challenging task [47]. ERP implementation
also requires substantive changes in business processes, routines, and
roles, as referred to business process reengineering (BRP), which is
also a difficult project [6,47,61,63]. Going a further step to integrate
ERP and e-business technologies to build a digitalized platform that
link business partners to perform business processes electronically
is even more complicated. Business processes such as procurement
and fulfillment are inherently complex, since it involves not only
the focal firm itself, but also its business partners. As firms integrating
ERP and e-business systems to link key suppliers and customers, they
have to reengineer business processes and IT systems not only the focal
firm itself, but also all the business partners in the supply chain [6,12].
The new business processes that are supported by a well integrated
ERP and e-business system are like dominoes in a row; each new
transaction sets off a cascade of new events [15,31].
Such complexity of integration requires firms' specific knowledge
and capacity, and is not easily imitated by others [66]. Therefore, inte-
grating ERP systems and e-business technologies to enable business
processes electronically transferred among focal firm and its business
partners is considered hard to be substituted from RBV's perspective,
and is proposed as a source of competitive advantage. Bendloy et al.
[11] argue that once entire value chains are acting as formidable
entities, using inter-firm ITs such as ERP and e-business technologies
to cooperate, the structures of these partnered communities are
hard to duplicate. The idiosyncrasy strengthens the sustainability
of the competitive advantages [11]. Although the individual IT itself
could contribute to firm performance, the process of integrating the
individual IT components to develop a platform tailored to a firm's
strategic context is much more complex, imperfectly understood,
and could contribute more business value to firms [12]. Accordingly,
we hypothesize that
H3. The complementary effect between ERP and e-business technolo-
gies is stronger than the main effects of ERP or e-business technologies
alone.
Lastly, since there are two perspectives on complementarity argued
in the theory: co-presence of two resources (model 1), and howthe two
resources are utilized and deployed in a firm(model 2), we want to test
the different perspectives on complementarity. This is to respond to the
call that researchers should compare the utility of different statistical
techniques and bring as many forms of “fit” as possible using the
same data set to understand complementarity [77]. As we think that
how two resources are utilized, deployed, and used in a mutually
reinforcing manner is muchmore difficult to be imitated by competitors
than co-presence of the two resources, we hypothesize that
H4. The complementarity based on how the two resources are utilized
and deployed in a firmcould contribute more in creating business value
than the complementarity based on IT resource-copresence.
4. Methodology
4.1. Data
To test our research model, a questionnaire was designed to collect
data on each of the variables in the model. We contracted SRBI Inc.
(Schulman, Ronca & Bucuvalus), which is a professional survey firm
that specializes in large-scale survey research, to conduct a telephone
survey. The sampling was selected randomly within U.S. manufacturing
industry. Interviews were conducted only with those companies that
make use of ERP in conducting their business. Eligible respondents
to the survey were the individuals who are considered the most knowl-
edgeable about ERP and e-business use in their companies, such as a
CIO or IS manager to have the best quality of data. Our target completes
were 150 interviews. In total, 1813 potential respondents were
contacted via telephone, with 226 firms finishing the survey.
Among the 226 firms, 76 firms were not ERP users; the remaining
150 firms provided usable data. The responsible rate is comparable
to previous large-scale ERP and e-business surveys as reported in
[5,25,42,43].
Table 2 shows the sample characteristics. The distribution of firm
size measured by employee numbers reflects a balance of large and
small firms. Computer, electronic products, and instruments are the
top three ERP using industries. Around half (46.7%) of the sampling
firms have 5–10 year ERP using experience. The majority (80%) of
ERP modules
E-Business
technologies for
communication
ERP and EB
Complementaries
H
1
H2
H
3
ERP and EB
System
Integration
ERP and EB
Business Process
Coordination
Complementary Effect between ERP and E-Business Technologies
(Direct Measure Approach)
Control Variables:
Firm Size, Industry, Year, ERP Vendor
Business
Value
Cost Efficinecy
Differentiation
Intangible
Fig. 3. Research model 2.
338 P.-F. Hsu / Decision Support Systems 56 (2013) 334–347
the respondents are CIOs or IS managers. We compared the profile of
the responding firms with non-responding firms on demographic
variables such as firm size and revenue using Chi-square analysis.
The results indicated no significant response bias. We also examined
common method bias that may potentially occur in survey data. Using
Harman's single-factor test [57], we found that one general factor can-
not account for the data variance, which indicates there is no significant
common method bias in our dataset.
1
Although ERP systems are designed with many modules to provide
integrated support, firms seem selective when choosing modules
to implement (Table 3). Transactional-oriented ERP modules, such as
inventory, purchasing, production planning, sales/order entry, and
finance modules, are used by more than 90% of the reported cases. In
contrast, analytical modules such as advanced planning and scheduling
(APS), data warehouse, andCRMmodules that analyze data provided by
the transactional modules are used less often. As for e-business technol-
ogies, websites are used by more firms (97%), while interorganizational
networks such as Extranet and EDI technologies are used by fewer firms
(37–51%).
4.2. Operationalization of constructs
Constructs and measurement items usedinthis researchare adapted
from previously validated measures, or are developed on the basis
of literature review. The process of operationalization of constructs as
well as prior research support, are discussed below and summarized
in Appendix C.
ERP modules refer to the scope of ERP system functions a firm
chooses to implement. Based on Porter's value chain concepts, ERP
modules can be of two types: value-chain based transactional modules
and enterprise support analytical modules [62]. Transactional modules
are aimed at integrating a firm's value chain activities: from upstream
material purchasing and inventory control modules, to the focal firm's
manufacturing module, to the downstream customer facing sales/
order entry module. In contrast, analytical modules focus on analyzing
the rawdata collected by the transactional modules to support business
decision making. These modules are often called ERP add-on modules
or Bolt-Ons. We include three analytical modules suggested to have
significant impacts onfirmperformance: advancedplanning andsched-
uling, data warehouse/business intelligence, and customer relationship
management. The way we measure the construct “ERP modules” is
similar to previous studies [5,31,42,43,75].
E-business technologies for communication refer to Internet-based
technologies that serve as channels for communication between two
firms (inter-organization) or two departments within a firm (intra-
organization) for performing e-business functions [26,87]. Following
Banker et al. [5], Geoffrion and Krishnan [26], and Zhu et al. [87], we
include three e-business technologies: extranet, websites, and EDI into
the research. Extranets are members-only networks run by individual
organizations to directly link two parties, and are implemented as
virtual private networks on the public Internet. Websites are usually
publicly assessable. They serve as the most economical and basic
means for performing e-business functions. Although websites usually
have limited e-business functionalities, they are the most affordable
electronic channels, and are included for their popularity in e-business.
EDI is included as an e-business technology for two reasons. First,
traditional EDI or VAN-based (Value Added Networks) EDI predates
the Internet, and has gradually moved toward Internet- based technol-
ogy, called Internet-based EDI. The EDI technology has been used for
more than two decades, and is still used by many firms for performing
B2B transactions. It is very common that both EDI and Internet technol-
ogies co-exist in a firm. In addition, IS researchers usually include EDI
transactions as part of e-business [5,26,50,71,87], and we adopt the
same approach to measure the e-business construct.
System integration represents the extent to whichdifferent informa-
tion systems are interconnected and can talk to one another [6,45]. It is
conceptualized to include the extent to which information systems are
integrated internally (both across functions, and between e-commerce
and traditional activities) and externally (along the value chain from
suppliers to end customers) [6,7,78,85]. Drawing upon this argument,
we measure ERP and e-business system integration by three items:
internally, (1) the extent a firm's ERP system is integrated with its
own front-end e-business systems; externally, (2) the extent a firm's
ERP systemis directly integrated withits business partners' information
systems, and (3) the extent a firm's ERP systemis assessable by its busi-
ness partners via electronic networks.
Following bothsupply chain literature and IS literature, business pro-
cess coordination is defined as the extent to which important operation-
al information is shared or conducted via electronic networks/systems
between a focal firm and its business partners [6,19,48,61,69,70].
Specially, we consider the sharing of inventory information, demand
information, production planning information, customer orders and
services as indicators of business process coordination. The five kinds
of information are selected because they are suggested to have signifi-
cant influence on firm performance in the supply chain literature
(see discussion below), are validated items used in a previous
study [13,23,61], and are identified as information that firms are
more willing to share in practice when we examine content validity
with consultants and industry experts.
Table 2
Sample characteristics (N = 150).
Employees # % Industry sector # %
b100 23 15.3% Food 5 3.3%
100–199 35 23.3% Apparel and fabric 3 2.0%
200–499 40 26.7% Furniture and fixtures 4 2.7%
500–999 14 9.3% Chemicals and allied products 9 6.0%
1000–4999 25 16.7% Rubber and plastics 5 3.3%
N4999 13 8.7% Leather 4 2.7%
Metal and fabricate metal 4 2.7%
Computer 21 14%
Electronic products 40 26.7%
Transportation equipment 5 3.3%
Measuring, controlling & medical
instruments
35 13.3%
Miscellaneous manufacturing 15 10%
Years of ERP use # % Respondents # %
b1 year 3 2.0% CIO 74 49.3%
1–5 years 22 14.7% IS manager 46 30.7%
5–10 years 70 46.7% Network/database administrator 12 8.0%
11–15 years 28 18.7% CFO/accounting manager 6 4.0%
N15 years 27 18.0% Others
a
12 8.0%
a
Others include vice president, general manager, COO (operation), and customer
service/sales manager.
1
Due to page limit, we do not provide details of the test results here. We will pro-
vide the full results upon request.
Table 3
Descriptive statistics for ERP and e-business technologies.
ERP Modules: Adoption Rate
Transactional modules: Inventory module 96%
Purchasing module 95%
Manufacturing module 90%
Sales/order entry module 95%
Financial and accounting module 97%
Analytical modules: Advanced planning and scheduling 59%
Data warehouse/business intelligence 40%
Customer relationship management 36%
E-business technologies
for communication:
Website 97%
Extranet 37%
EDI 51%
339 P.-F. Hsu / Decision Support Systems 56 (2013) 334–347
Lee et al.'s [38] study indicates that sharing of inventory information
can reduce total inventory holding level in a firm and in a supply chain
thereby decreasing inventory costs. Sharing of demand related informa-
tion improves forecasting and replenishment [61,75]. In contrast, with
no sharing of demand related information, distorted demand signals
would be amplified and transferred upstream across the supply chain
to cause bullwhip effect [38]. Sharing of production planning informa-
tion can enhance operational efficiencies through improved coordina-
tion of allocated resources, activities, and roles across the supply chain
[39,61]. Customer orders and services conducted online improve
customer satisfaction and increase efficiency [61]. Our study specifically
measures the level that a firm uses electronic networks (e-business
technologies) rather than traditional means (face to face, telephone,
fax etc.) to share operational information stored in ERP systems.
The reason is that only real-time information sharing enabled by
e-business technologies allows firms in supply chains to timely
synchronize production, coordinate inventory-related decisions,
and develop a shared understanding of performance bottlenecks
[14,40]. While system integration is concerned with a firm's tech-
nical capability to link information systems along the supply
chain, business process coordination measures the information that
actually is shared or conducted among supply chain partners. This
view echoes Markus's propositions [45], and is consistent with prior
studies [6,61].
Business value attributable to ERP is measured by three sub-
constructs — cost efficiency, differentiation, and intangible benefits —
the three aspects of ERP related performance that concern firms and
that the IS literature oftenuses [61,63]. They are recognizedas resources
for creating competitive advantages, and are important performance
impacts after implementing ERP [20]. While Porter [58] argues that
firms must balance cost efficiency and differentiation, and may choose
either one to master, the ERP literature argues that ERP systems have
the ability to improve all the three dimensions (see literature review
of ERP discussed above). Thus, business value is conceptualized as a
second-order construct, manifested in the three dimensions.
2
Whereas
subjective measures of firm performance from the survey were used in
the study, we also validatedthese measures using objective accounting-
based firm performance data. We collected inventory costs (INVT),
Cost of Goods Sold (COGS), and Selling, General and Administrative
Expense (SG&A) data for firms inour sample, following previous studies
[31,59,86].
Firm size, industry, year, and ERP vendor are used as control variables
in the model. Literature suggests that companies of different sizes
tend to perceive different ERP benefits [43]. Thus we include firm size
measured by the number of employees into the model. Furthermore,
Melville et al.'s review study of IT business value [50] concludes
that certain industries attain higher IT business impacts and greater
cost reduction than others. They argue that in time-sensitive industries
suchas personal computers, there is anample opportunity to apply IT to
reduce cycle times, better manage inventory, and improve customer
satisfaction. In our sample, we also found that high-tech manufacturing
industries (computer, electronic product, and instruments) adopt ERP
systems more often than traditional manufacturing industries. We
then add an industry dummy variable (high tech vs. traditional) to
investigate the industry effect. Finally, firms are eager to know when
their investments on ERP systems can be paid back and which ERP
vendors' product may be better. We include the year and ERP vendor
dummy variables to investigate the issues.
4.3. Instrument validation
To validate the instruments, we conducted a confirmatory factor
analysis using partial least squares (PLS-Graph version 3.00). The
ability of PLS to model both formative and reflective constructs
makes it appropriate for conducting our research. For reflective con-
structs, we examined convergent validity, construct reliability, and
discriminant validity. The measurement properties are provided in
Table 4. Construct reliability measures the stability of the scale based
on an assessment of the internal consistency of the items measuring
the construct. In Table 4, all the reflective constructs have a composite
reliability over the cutoff of 0.70, as suggested by Straub [72].
Convergent validity is verified through the t-statistic for each factor
loading. As shown in Table 4, all factor loadings are greater than
the typical cutoff value of 0.5 and significant at the p b 0.01 level.
Discriminant validity measures the extent to which different con-
structs diverge from one another. In Table 5, the diagonal elements
represent the square root of average variance extracted (AVE), pro-
viding a measure of the variance shared between a construct and
its indicators. The square root of AVE is required to be larger than
the correlations between constructs, i.e., the off-diagonal elements
to meet discriminant validity [22,30]. The reflective constructs used
in the model meet the criterion. For formative constructs, we check
the four criteria suggest by Rai et al. [61] and Petter et al. [56],
3
and
found that the two constructs used in our study (ERP modules and
e-Business technologies) should be modeled formatively. The weights
of measurement items in the two constructs are all significant
(Table 6), which suggest that our formative constructs have good quality
[17,56].
Two second-order constructs are used in the model: “ERP and
e-business complementarity” and “business value”. We use the second-
order construct because it is a general, more global factor that explains
all the covariation among the first order factors [17,64]. A second order
construct is modeled as being at a higher level of abstraction, and is
usedcommonly inIS literature [17,61]. “ERP ande-business complemen-
tarity” is composed of two first order factors (SI and BPC), based on IS
literature's distinction between information system integration and
business process coordination [6,48]. System integration (SI) measures
how the two technologies are integrated at the information system
level, while business process cooperation (BPC) measures how the
integrated ERP and e-business system is utilized at the business process
coordination level. System integration is viewed as a prerequisite and
facilitator of business coordination [48]. Rai et al.'s study [61] on supply
chain integration capabilities distinguishes “IT infrastructure integra-
tion” and “supply chain process integration”. We adopt the same view
and measure “ERP and e-business complementarity” both at system
integration level and business process coordination level. “Business
value” is measured by three sub-constructs —cost efficiency, differentia-
tion, and intangible benefits, since the ERP literature argues that ERP
systems have the ability to improve all the three dimensions. Validity of
the second-order constructs is shown in Table 7. The paths from the
second-order construct to the first-order factors are significant and of
high magnitude, greater than the suggested cutoff of 0.7 [17].
5. Empirical results
We tested the two research models using PLS-Graph version 3.00.
Both models were run using standardized construct values, and
the standardized path coefficients can be interpreted and compared
directly.
5.1. Empirical results of model 1
Model 1 uses the most common approach of testing a complemen-
tary effect — the product terms approach. Fig. 4 shows that both ERP
2
Please note these firm measures do not reflect the overall performance of the firm,
but only the improvements that are related to ERP implementation.
3
Whether a construct should be modeled as formative or reflective could be judged
by four criteria (Rai et al. 2006): (1) direction of causality from construct to indicators,
(2) interchangeablity of indictors, (3) covariation among indicators, and (4) nomolog-
ical net of construct indicators.
340 P.-F. Hsu / Decision Support Systems 56 (2013) 334–347
modules and e-business technologies have positive and significant
affects on business value (0.266*** and 0.247*** respectively). The
results indicate that the more comprehensive ERP modules and
e-business technologies a firm implements, the higher business
value it may receive. Hypotheses H1 and H2 are supported. The
interaction effect between ERP and e-business technologies is strong
and significant (0.158**). The result shows that the presence of one
resource enhances the value of another resource. One unit investment
in e-business technologies could increase ERP's contribution to business
value by 0.158 units. The model canexplain18.4%of the variance infirm
performance.
We further break down the ERP construct into two items (transac-
tional and analytical modules) and compare the contribution of each
of the items. This comparison helped us understand which ERP sub-
modules are more important than others in terms of their effects on
final firm performance. The factor weight of analytical modules is
0.712, greater than that of the transactional modules (0.510), which
indicates that the analytical modules might contribute more to business
value. Recalling that the analytical modules are used less by firms
compared to the transactional modules, here we provide evidence to
support RBV theory's argument: when a resource is rarer and valuable,
it can make a greater contribution to generating rents. The results also
suggest that firms, which have invested much in the traditional ERP
modules that focus on collecting transactional data, should now invest
in the analytical modules that can further analyze transactional data
to support business decision making.
Control variables provide some further interesting findings. First,
firms are eager to know when their investments on ERP systems can
be paid back. Using year dummy variables, we found that firms start
to feel some business value one year after their ERP implementation
(0.165*), before that, the business value is marginal (0.066). The most
significant business value increment happens after five years of using
ERP systems (0.285***). Industry experts predict a four to five year
learning time for ERP implementation [35,82], and our data confirms
their prediction. Firms need to adjust their business processes to best
fit the ERP systems, and it therefore takes some time to see the perfor-
mance improvement.
Second, firm size is negatively associated with ERP business value,
whichsuggests that smaller firms perceive more performance improve-
ment. One possible reason provided by a previous study [43] as well as
our survey results is that smaller firms are more likely to change their
business processes to fit ERP system, which can minimize complicated
and costly system modifications and may result in higher perceived
performance improvement. On the other hand, larger firms usually
have complex operations and organizational structures, and customiza-
tion is usually unavoidable [45,46]. Mabert and Soni [43] find that there
is significant difference between small and large firms in terms of
their ERP customization level; large firms customize more. Third, indus-
try and ERP vendor control variables are insignificant, which suggests
that high-tech and traditional manufacturing industries, and firms that
use different ERP products, perceive no difference in business value
creation.
5.2. Empirical results of model 2
Fig. 5 shows the results of model 2. ERP modules and e-business
technologies again show positive and significant impacts on business
value (0.202*** and 0.147***). More important, the complementary
effect between ERP and e-business technologies is stronger than the
main effects of ERP or e-business technologies alone (H3 is supported),
and the magnitude (0.321***) is also greater than that in the model 1
(0.158**). The result further shows that while the co-presence of two
technologies is likely to be a source of competitive advantage, resource
complementarity based on how the two resources are utilized and
deployed in a firm could contribute more in creating business value
for firms. Thus, hypothesis 4 is supported.
5.2.1. Robustness test of the complementary effects
While we can directly compare the path coefficients of the two
complementary constructs in model 1 and model 2, we also calculated
effective size of the two interaction terms to understand their relative
strength. Effective size provides a more robust estimation of the degree
to which a phenomenon such as an interaction effect or a complemen-
tarity effect exists in a population[18]. The standard approach for deter-
mining the strength of an interaction effect involves contrasting the
Table 5
Reflective constructs: Discriminant validity of instruments.
Constructs (1) (2) (3) (4) (5)
(1) ERP and EB system integration 0.649
(2) Business process coordination 0.253 0.703
(3) Cost efficiency 0.046 0.205 0.630
(4) Differentiation 0.215 0.346 0.195 0.579
(5) Intangible benefits 0.042 0.092 0.289 0.460 0.865
Note: Diagonal elements are the square root of average variance extracted (AVE), which,
for discriminant validity, should be larger than interconstruct correlations (off-diagonal
elements).
Table 6
Formative constructs.
Formative constructs Indicators Weight
ERP modules TRA 0.439
⁎⁎⁎
ANA 0.769
⁎⁎⁎
E-business technologies for communication EB1 0.447
⁎⁎⁎
EB2 0.369
⁎⁎⁎
EB3 0.643
⁎⁎⁎
⁎⁎⁎ p b 0.01.
Table 7
Measurement model: Second-order constructs.
Second order
constructs
First order constructs Loadings t-stat Composite
reliability
ERP and e-business
complementarity
System integration (SI) 0.803
⁎⁎⁎
9.75 0.843
Business process
coordination (BPC)
0.877
⁎⁎⁎
19.48
Business value Cost efficiency 0.705
⁎⁎⁎
7.36 0.805
Differentiation 0.772
⁎⁎⁎
8.21
Intangible benefits 0.787
⁎⁎⁎
17.17
⁎⁎⁎ p b 0.01.
Table 4
Reflective constructs: reliability, and convergent validity.
Reflective constructs Indicators Loading Convergent
validity (t-stat)
Reliability
ERP and EB system integration SI1 0.779
⁎⁎⁎
17.87 0.847
SI2 0.815
⁎⁎⁎
21.60
SI3 0.822
⁎⁎⁎
23.28
Business process coordination BPC1 0.877
⁎⁎⁎
10.84 0.819
BPC2 0.822
⁎⁎⁎
7.13
BPC3 0.735
⁎⁎⁎
5.79
BPC4 0.744
⁎⁎⁎
6.79
BPC5 0.708
⁎⁎⁎
4.17
Cost efficiency CE1 0.757
⁎⁎⁎
9.90 0.836
CE2 0.833
⁎⁎⁎
32.77
CE3 0.788
⁎⁎⁎
17.29
Differentiation DF1 0.808
⁎⁎⁎
17.77 0.805
DF2 0.748
⁎⁎⁎
13.21
DF3 0.723
⁎⁎⁎
9.33
Intangible benefits IN1 0.871
⁎⁎⁎
61.67 0.858
IN2 0.859
⁎⁎⁎
22.61
⁎⁎⁎ p b 0.01.
341 P.-F. Hsu / Decision Support Systems 56 (2013) 334–347
difference between the squared multiple correlation (R
2
) for the main
effects model (without interaction term) and the interaction models.
Then related f
2
effective size can be computed.
4
Based on the results
of the two competing models (model 1: f
2
= 0.020, small effect;
model 2: f
2
= 0.097, medium effect), we found that introducing the
direct measure approach into model 2 provides greater evidence for
complementarity. The direct measure approach significantly adds to
the variance explained in the dependent variable. The effect of using
ERP and e-business technologies in a mutually reinforcing manner
is more important in extracting the complementarity value for firms.
5.2.2. System integration vs. business process coordination
By breaking down the complementarity effect, we can see the
relative contribution of system integration and business process
coordination to business value. Our results show that the magnitude
of business process coordination (0.728 ∗ 0.321) is greater than that of
systemintegration (0.303 ∗ 0.321) in creating business value. The find-
ings suggest that although system integration is necessary and difficult
to achieve, a firm's willingness to do a higher level of business process
coordination might be more important.
5.3. Analysis with objective accounting data
To validate our results obtained with subjective measures of busi-
ness value, we collated equivalent accounting-based firm performance
data from COMPUSTAT with survey data. Among the 150 firms in our
sample, 19 firms are private organizations for which accounting-based
performance measures are not available fromCOMPUSTAT, and 8 public
firms have a serious missing value problem and were excluded in our
sample. These result in a dataset with objective and subjective perfor-
mance measures for 123 matched firms.
Because we know the year in which each sample firm implemented
its ERP system from the survey, we collected INVT, COGS, and SG&A
data for each of the 123 firms for the year of ERP implementation and
then, 1, 2, 3, 4, 5, 6 and 7 years after ERP implementation. Note that
each firm has different years of using ERP systems. Therefore, we
computed firm performance difference 1, 2, 3, 4, 5, 6, and 7 years after
ERP implementation for each firm as applicable.
5
These time series
data can reveal when firms would receive business value since ERP im-
plementation. Inventory costs, COGS, and SG&A are commonly used
accounting indices for evaluating operational efficiency of a firm, and
are suggested to be impacted by ERP systems [31,59,86]. However,
performance measures for differentiation and intangible benefits used
in the survey do not have equivalent accounting-based measures. Thus,
the objective performance only includes the cost efficiency construct.
Table 8 shows the objective measures.
We then ran the models 1 and 2 withobjective accounting measures
(cost efficiency only) as the dependent variable, while all other specifi-
cations are identical to the models tested with perceptual business
value measures. Fig. 6 shows the results of model 2.
6
We found that
the significant paths are replicated in year 1 and year 2 after ERP imple-
mentation: ERP and e-business technologies have significant impacts
on cost efficiency, while ERP and e-business complementarity is the
strongest factor to affect cost efficiency. After two years of ERP imple-
mentation, the main effects of ERP and e-business technology decrease
and become insignificant, but the complementarity effect between them
remains significant to affect cost efficiency. These results provide addi-
tional support for the validity of the subjective performance measures.
6. Discussion
ERP systems, whenintegratedwithe-business technologies properly,
will support a firm's business to business integration to streamline the
flowof materials and information in supply chains. This complementary
effect has been proposed by several IS researchers as being the mecha-
nism to fully exploit the value of information technology [3,45–48,75],
but to our knowledge has not beenempirically testedbefore. The present
study provides empirical evidence of the complementary effect. We
found that while both ERP and e-business technologies have direct and
positive impacts on business value, the two IT resources do complement
each other. The existence of one resource enhances the value of the
other. Furthermore, the complementary effect based on how the two
resources are utilized and deployed in a firm could contribute more
than the main effects of ERP or e-business technologies alone in creating
business value. We argue that it is the complementary use of the two IT
resources to build systemintegration and business process coordination
capabilities that is the key mechanism in creating greater business
value. We further argue that it is the integration capabilities which
create competitive advantage as the technology is imitable whereas
the knowledge about how to effectively integrate the technologies
and business processes is firm specific. The complementary value that
comes from co-presence of the two ITs is weaker.
6.1. Managerial implication
Several important managerial implications follow from these
results. First, since system integration and process coordination need
4
f
2
= [R
2
(interaction model) − R
2
(main effects model)] / [1 − R
2
(main effect
model)]. Interaction effect sizes are small if 0.02, medium if 0.15, and large if 0.35 (Chin
2003).
5
Originally, we collected firm performance accounting data for each firm from year
1 to year 15 after ERP implementation as applicable. However, there are only 34 firms
(observations) available since year 8, which is less than the required sample size to
have a robust statistical estimation. A rule of thumb of sample size is “10 times the
number of independent variables,” (Chin, 1998). We have 5 independent variables,
and 50 firms (observations) is the desired sample size. Thus, we do not report the es-
timation results after year 8.
6
Results of model 1 are similar to that of model 2, and will be provided upon
request.
ERP modules
E-Business
technologies for
communication
ERP*EB
Interaction
Business
Value
Cost Efficinecy
Differentiation
0
.
2
6
6
*
*
*
0.247***
0
.
1
5
8
*
*
0.770***
0
.
6
4
8
*
*
*
R
2
=18.4%
*** p<0.01; ** p<0.05; * p<0.1
Transactional
Analytical
0
.5
1
0
*
0
.7
1
2
***
Y 0-1 Y1-5 Y 5-10 Y 10-15
0
.
0
6
6
0
.
1
6
5
*
0
.
2
8
5
*
*
* 0
.
1
0
1
*
Firm Size
-
0
.
1
9
4
*
*
Industry
0
.0
5
5
ERP
Vendor
0
.0
0
8
Intangible
0
.
7
9
1
*
*
*
Fig. 4. Model 1 empirical results (product term approach).
342 P.-F. Hsu / Decision Support Systems 56 (2013) 334–347
huge investments, both in money and in time, they are considered as
risky investments. In addition, business process coordination is a partic-
ularly challenging task since a firmhas to convince every department in
its organization, business partners, suppliers, and especially customers
that each entity along the supply chain will benefit from information
sharing. Whether the cost and effort invested in the system integration
and process coordination would be justified for the organization is
questionable. Based on our results, we show that the investments
would pay off. The higher level of system and business coordination
a firm achieves, the better performance it receives.
Second, referring back to our research question about how firms
could build their complementarity between ERP and e-business tech-
nologies, we show that at the system integration level, a firm should
tightly integrate its internal ERP and front-end e-business systems.
More importantly, outside the focal firm, it should make its ERP system
accessible to its business partners either by an extranet connection, or
by integrating its ERP system directly with business partners' informa-
tion systems — the two approaches illustrated in Fig. 1.
Third, at the business process coordination level, firms should
utilize the integrated ERP and e-business system to build firm specific
business coordination capability, such as sharing inventory, production
planning and sales forecasting information. Research shows that close
business process coordination can reduce the bullwhip effect, decrease
inventory level, and accelerate products' time to market [16]. A firm is
encouraged to share business information by utilizing what the inte-
grated IT system enables. Barney [8] indicates that relatively few firms
have been able to deeply embed their information processing system
into their daily business process and management decision-making
process. The inherent difficulty of creating close business-IT alignment
may hold the potential of sustained competitive advantage for those
than can do so.
6.2. Contributions to theory
This study makes three specific contributions to the IS literature.
First, based on the RBV and microeconomic theory, we proposed
two research models for studying ERP, e-business technologies, and
their complementary effect. We provided a theoretical explanation
of why the complementary effect exists and why it is more important
than the resource itself. Second, we used two different approaches to
gage the complementary effect to compare the utility of different
statistical techniques using the same data set. This not only provides
a more robust assessment of the complementary effect, but unpacks
the effect from traditional “black-box” approach. The product-term
approach shows that the co-existence of the two complementary
technologies in a firm does provide additional performance improve-
ment. However, the direct measure approach shows that the most
complementary value can be extracted by firms that can utilize the
two complementary ITs in a mutually reinforcing manner. Using differ-
ent approaches to gage complementarity has been proposed by many
scholars for a long time, but has seldom been done in the past research
[77]. Our study shows that the direct measure of complementarity
provides greater evidence. Third, we conceptually and empirically
distinguish between two capabilities: system integration and business
process coordination. We argue that organizations vary on these capabil-
ities, which may serve as firmspecific elements that RBV argues to affect
the realization of business value.
6.3. Future research and limitations
The study has two limitations. First, due to budget limitation, this
research only asked one single subject to provide both the independent
and dependent variable measures. There may be a tendency for subjects
to give socially appropriate answers. Although we have incorporated
accounting based performance data and performed statistical examina-
tion to validate the perceptual measures, future research is encouraged
to use multiple responses in data collection to reduce the potential bias.
Furthermore, CIO and IS managers may not be the best respondents
to answer ERP impact questions related to customer service area.
Therefore, collecting data frommultiple respondents in a firmis encour-
aged in future research. Second, while ERP and e-business technologies
might lead to higher business performance, both IT value literature
[50] and ERP literature indicate that mere adoption of IT systems does
not guarantee by itself the achievement of performance improvements.
It is only when they are accompanied by the development of effective
IT capabilities and other organizational facilitators that IT investments
produce operational improvements [79]. The fact that adopters of
similar ERP systems and e-business technologies often exhibit pro-
foundly different results suggests that there are some firmspecific com-
petencies that explain why some firms succeed while others fail. The
present study has shown that system integration and business process
coordination are two firm specific capabilities that affect final firm
performance. Future research could examine other organizational char-
acteristics such as business process changes, organizational structure,
top management involvement, and environment context that may
moderate the value of IT [83]. We plan to collect data for these variables
inour future researchto provide richer andpotentially more explanatory
models.
Table 8
Objective measures of business value.
Objective measures
[Inventory/sales]
(t = 1, 2, 3, … 7)
− [Inventory/sales]
(t = 0)
[COGS/sales]
(t = 1, 2, 3, … 7)
− [COGS/sales]
(t = 0)
[SG&A/sales]
(t = 1, 2, 3, … 7)
− [SG&A/sales]
(t = 0)
Note: t = 0, year of ERP implementation; t = 1, one year after ERP implementation etc.
ERP modules
E-Business
technologies for
communication
ERP and EB
Complementarity
0
.
2
0
2
*
*
*
0.147***
0
.
3
2
1
*
*
*
*** p<0.01; ** p<0.05; * p<0.1
ERP and EB
System
Integration
0
.
3
0
3
*
*
*
0
.
7
2
8
*
*
*
ERP and EB
Business Process
Coordination
Business
Value
Cost Efficinecy
Differentiation
0.785***
0
.
7
5
6
*
*
*
R
2
=25.1%
Y 0-1 Y1-5 Y 5-10 Y 10-15
0
.
0
0
5
0
.
1
1
4
0
.
1
9
4
*
* 0
.
1
0
1
Firm Size
-
0
.
2
2
0
*
*
*
Industry
-
0
.0
6
4
ERP
Vendor
0
.0
0
9
Intangible
0
.
7
8
8
*
*
*
Fig. 5. Model 2 empirical results (direct measure approach).
343 P.-F. Hsu / Decision Support Systems 56 (2013) 334–347
Appendix A. Previous studies on value of ERP systems
Article Theory Sample/methodology Main results (business value of ERP)
1 Mabert, Soni, and
Venkataramanan
The International
Journal of Management Science,
2003
No specific theory
is used.
▪ 18 case studies and a survey of
215 US manufacturing firms
that were ERP adopters in year 1999.
▪ Descriptive analysis
Intangible level:
The most improvements after using ERP
systems are in intangible areas,
such as increased Interaction across the
enterprise, quicker response
times for information, integration of business processes,
and availability and quality of information.
2 Gattiker and Goodhue
MIS Quarterly
2005
Organizational
information
processing theory
▪ Survey of 111 manufacturing plants.
▪ OLS regression.
Intangible level:
ERP could deliver intangible benefits to firms:
Better information, more efficient internal
business process, and better coordination
between different units of the firm.
3 Banker et al.,
MIS Quarterly
2006
Dynamic capability
theory
▪ Survey data of 1077 U.S.
manufacturing plants
▪ WLS regression
Operational level:
Through the mediation effect
of manufacturing capabilities,
ERP systems have impacts on plant
performance including product quality,
product time to market, and plant efficiency
4 Cotteleer and Bendoly
MIS Quarterly
2006
Operations
management and
continuous
improvement
▪ Longitudinal order lead-time data
from an ERP implemented firm
▪ ANCOVA and GLS
Operational level:
Order fulfillment lead-time showed a significant
improvement immediately
after ERP system deployment.
5 Karami, Somers,
and Bhattacherjee
JMIS
2007a,b
Innovation Diffusion
theory & Resource
Based View
▪ Survey data of 148 US
manufacturing firms
▪ PLS
Operational level:
Extent of ERP implementation influences
business process outcomes,
including process efficiency, effectiveness, and flexibility.
6 Hitt, Wu, and Zhou
Journal of Management
Information Systems
2002
IT productivity ▪ Compares financial performance of 350
ERP adopters from 1986 to 1998 with
non-adopters.
▪ OLS regression.
Financial level:
ERP adopters show more positive impacts
than non-adopters on
▪ Productivity measure (value added),
▪ Profitability measures (ROA, profit margin,
sales/emp, sales/assets,
and inventory turnover) (but not on ROE)
▪ Market value (Tobin's q).
ERP modules
E-Business
technologies for
communication
ERP and EB
Complementarity
0
.
1
0
8
*
0.106*
0
.
3
5
3
*
*
*
*** p<0.01; ** p<0.05; * p<0.1
ERP and EB
System
Integration
Business
Process
Coordination
0
.
1
4
2
*
0
.
9
2
6
*
*
*
Cost Efficiency
Difference
R
2
=32.3%
0
.9
5
5
*
*
*
0.863***
0
.8
1
9
*
*
*
1 year firm performance difference after ERP implementation
∆ INVT/Sales
∆ COGS/Sales
∆ SG&A/Sales
Dependent Variable: Cost Efficiency Difference (Objective Accounting Data )
(1,2,3,4,5,6, and 7 years after ERP implementation)
Y1 Y2 Y3 Y4 Y5 Y6 Y7
ERP Modules 0.108* 0.129* 0.107 0.030 0.090 0.108 0.187
E-B technologies for commu. 0.106* 0.199* 0.090 0.020 0.043 0.120 0.101
ERP and EB Complementarity 0.353*** 0.250** 0.495*** 0.492*** 0.355*** 0.201*** 0.229***
R-square 32.3% 24.9% 34.0% 34.0% 26.3% 20.1% 21.8%
Observations (firms) 123 113 105 101 77 66 59
Fig. 6. Empirical results using objective firm performance data.
344 P.-F. Hsu / Decision Support Systems 56 (2013) 334–347
Appendix B. Previous studies on value of e-business
Appendix C. Measurement items for key research variables
Article Theory or model Sample/methodology Main results
1 Zhu and Kraemer
Information Systems Research
2002
▪ Resource based view
▪Dynamic capabilities
▪ Objective accounting data
of 260 US manufacturing companies
▪ OLS regression and structural
equation modeling (SEM)
▪ E-business capability is significantly related to Cost of
Goods Sold (COGS) and inventory turnover (INVX).
▪ E-business capability has weak association with
sales/employee and gross margin.
2 Zhu
J. of Management Information
Systems
2004
▪ Resource based view ▪ Objective accounting data of 114
US retailing firms
▪ OLS regression and structural equation
modeling (SEM)
▪ E-business capability is significantly related to sales/
employee, GOGS/employee, and inventory turnover.
▪ E-Business capability is not associated with ROA.
3 Amit and Zott
Strategic Management
Journal
2001
▪ Value chain analysis
▪ Schumpeterian innovation theory
▪ Resource based view
▪ Strategic network theory
▪ Transaction cost theory
▪ 59 American and European
e-business firms. (Case study)
▪ E-business firm is defined as:
at least 10% of its revenues from
transactions conducted over the Internet.
▪ Developed a model of the sources of value
creation. The model suggests that the potential
e-business value hinges on: efficiency, comple-
mentarities, lock-in, and novelty.
4 Lederer, Mirchandani,
and Sims
Int. J. of Electronic Commerce
2001
▪ No specific theory is used. ▪ 212 companies that created online
shopping malls.
▪ Use SEM.
▪ Better business efficiency and better information
access and flexibility can contribute to customer
relation.
▪ Through improved customer relations, firms can
have strategic advantage.
5 Barua et al.
MIS Quarterly
2004
▪ Resource based view ▪ Self-report survey data of 1076
firms cross industry
▪ SEM
▪ After using e-business initiatives, firms' financial
performance (subjective evaluation of ROA, GPM,
ROI, and Sales/emp) has been significantly improved.
6 Zhu, Kraemer, Xu,
and Dedrick
JMIS
2004
▪ Technology-organization-environment
framework
▪ Self-report survey data of 612
financial firms
▪ E-business impacts can be categorized into three
dimensions: sales increase, internal efficiency, and
coordination
7 Zhu and Kraemer
Information Systems Research
2005
▪ Technology-organization-environment
framework
▪ Resource based view
▪ Self-report survey data of
624 retailing firms
▪ E-business impacts can be categorized into three
dimensions: sales increase, internal efficiency, and
procurement costs decrease.
(continued)
Article Theory Sample/methodology Main results (business value of ERP)
7 Aral, Brynjolfsson and Wu
Proceedings of International
Conference on Information Systems
2006
IT productivity ▪ Analyzes financial performance data
for 623 ERP adopters from 1998–2005.
OLS regression.
Financial level:
ERP adoption improves productivity,
inventory turnover, and asset utilization,
but not ROA, ROE, and Profit margin.
8 Poston and Grabski
International Conference on
Information Systems
2000
Transaction costs
economics
▪ Compares financial performance of 54
ERP adopters from 1980–1997 to control
firm counterparts.
▪ Pair samples T-test.
Financial level:
▪ ERP implementation is associated with
a significant cost increase one year
after implementation. No significant association
after years 2 and 3.
▪ ERP implementation is not associated
with changes in income.
9 Ranganathan and Brown
Information Systems Research
2006
No specific theory
is used
▪ Event study approach.
▪ Test whether abnormal stock
market return exists in 116 ERP
investment announcement
Financial level:
ERP projects with greater functional
scope or greater physical scope result
in higher shareholder returns.
Negative returns are found for projects with
lesser functional scope and lesser physical scope.
Constructs Indicators Literature support
ERP module TRA Transactional module, measured by the number of modules the organization use in the following list:
• [TRA1] purchasing module
• [TRA2] inventory/material management module
• [TRA3] manufacturing module
• [TRA4] sales/order enter module
[5,31,62]
ANA Analytical module, measured by the number of modules the organization use in the following list:
• [ANA1] data warehouse/business intelligence module
• [ANA2] advanced planning and scheduling module
• [ANA2] customer relationship management module
E-business technologies
for communication
EB Does your firm …
[EB1] use an extranet
[EB2] use a website
[EB3] use EDI
[26,86,87]
ERP and EB system
integration
SI On a scale of 1 to 5 where “1” means “not at all” and “5” means “a great deal,” please rate,
To what extent is your firm's ERP system
[6,7,85]
[SI1] Integrated with your front-end e-business systems?
[SI2] Integrated with your business partners' information systems?
[SI3] Accessible by your business partners via a web-site, EDI, or other electronic networks?
(continued on next page)
Appendix A (continued)
345 P.-F. Hsu / Decision Support Systems 56 (2013) 334–347
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Constructs Indicators Literature support
Business process
coordination
BPC On a scale of 1 to 5 where “1” means “not at all” and “5” means “a great deal,”
to what extent does your firm and your suppliers use electronic networks to
[13,23,45,61]
[BPC1] Share inventory availability or stock level
[BPC2] Share production planning or schedule capacity
[BPC3] Share demand and forecasting information
[BPC4] to what extent does your firm and your customers use electronic networks to conduct customer orders
[BPC5] Sum of the following questions: Does your firm use website or other electronic means to
support the following customer services?
Order status tracking (Y/N)
Service or technical support (Y/N)
Product customization (Y/N)
Shipping fulfillment (Y/N)
Business value
attributable to ERP
To what extent have the following increased, decreased, or stay the same in your firm as a result of using ERP?
1 — increased a lot; 2 — increased somewhat; 3 — increased only a little; 4 — stay the same; 5 — decreased only a little;
6 — decreased somewhat; and 7 — decreased a lot.
Cost efficiency CE [CE1] Operational costs [31,58,61,63]
[CE2] Procurement costs
[CE3] Inventory costs
Differentiation DF [DF1] Quality of customer service and support
[DF2] On time delivery
[DF3] Product quality
Intangible IN [IN1] Information quality
[IN2] Decision support
Cost efficiency
(accounting data)
CEA [CEA1] [COGS/sales
(t = 1, 2, 3,4, 5, 6, 7)
] − [COGS/sales
(t = 0)
] [31,59,86]
[CEA2] [SG&A/sales
(t = 1, 2, 3, 4, 5, 6, 7)
] − [SG&A/sales
(t = 0)
]
[CEA3] [Inventory/sales
(t = 1, 2, 3, 4, 5, 6, 7)
] − [inventory/sales
(t = 0)
]
t = 0: Firm performance in the year of ERP implementation; t = 1:one year after ERP implementation.
Appendix C (continued)
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Pei-Fang Hsu is an assistant professor at College of Technology Management, National
Tsing Hua University, Taiwan. She received her Ph.D. in Information Systems from the
Paul Merage School of Business at University of California, Irvine. Her research focuses on
e-business use and impacts at firm level, integration of ERP and e-business technologies,
and IT services management.
347 P.-F. Hsu / Decision Support Systems 56 (2013) 334–347